CAMBRIDGE – America's two political parties rarely agree, but one thing that unites them is their anger about “currency manipulation," especially by China. Perhaps spurred by the recent appreciation of the dollar and the first signs that it is eroding net exports, congressional Democrats and Republicans are once again considering legislation to counter what they view as unfair currency undervaluation. The proposed measures include countervailing duties against imports from offending countries, even though this would conflict with international trade rules.

This is the wrong approach. Even if one accepts that it is possible to identify currency manipulation, China no longer qualifies. Under recent conditions, if China allowed the renminbi to float freely, without intervention, it would be more likely to depreciate than rise against the dollar, making it harder for US producers to compete in international markets.

But there is a more fundamental point: From an economic viewpoint, currency manipulation or unfair undervaluation are exceedingly hard to pin down conceptually. The renminbi's slight depreciation against the dollar in 2014 is not evidence of it; many other currencies, most notably the yen and the euro, depreciated by far more last year. As a result, the overall value of the renminbi was actually up slightly on an average basis.

The sine qua non of manipulation is currency-market intervention: selling the domestic currency and buying foreign currencies to keep the foreign-exchange value lower than it would otherwise be. To be sure, the People's Bank of China (PBOC) did a lot of this over the last ten years. Capital inflows contributed to a large balance-of-payments surplus, and the authorities bought US dollars, thereby resisting upward pressure on the renminbi. The result was as an all-time record level of foreign exchange reserves, reaching $3.99 trillion by July 2014.

But the situation has recently changed. In 2014, China's capital flows reversed direction, showing substantial net capital outflows. As a result, the overall balance of payments turned negative in the second half of the year, and the PBOC actually intervened to dampen the renminbi's depreciation. Foreign-exchange reserves fell to $3.84 trillion by January 2015.

There is no reason to think that this recent trend will reverse in the near future. The downward pressure on the renminbi relative to the dollar reflects the US economy's relatively strong recovery, which has prompted the Federal Reserve to end a long period of monetary easing, and China's economic slowdown, which has prompted the PBOC to start a new period of monetary stimulus.

Similar economic fundamentals are also at work in other countries. Congressional proposals to include currency provisions in the Trans-Pacific Partnership, the mega-regional free-trade agreement currently in the final stage of negotiations, presumably target Japan (as China is not included in the TPP). Congress may also want to target the eurozone in coming negotiations on the Transatlantic Trade and Investment Partnership.

But it has been years since the Bank of Japan or the European Central Bank intervened in the foreign-exchange market. Indeed, at an unheralded G-7 ministers' meeting two years ago, they agreed to a US Treasury proposal to refrain from unilateral foreign-exchange intervention. Those who charge Japan or the eurozone with pursuing currency wars have in mind the renewed monetary stimulus implied by their central banks' recent quantitative easing programs. But, as the US government knows well, countries with faltering economies cannot be asked to refrain from lowering interest rates just because the likely effects include currency depreciation.

Indeed, it was the US that had to explain to the world that monetary stimulus is not currency manipulation when it undertook quantitative easing in 2010. At the time, Brazilian Finance Minister Guido Mantega coined the phrase “currency wars" and accused the US of being the main aggressor. In fact, the US has not intervened in a major way in the currency market to sell dollars since the coordinated interventions associated with the Plaza Accord in 1985.

Other criteria besides currency-market intervention are used to ascertain whether a currency is deliberately undervalued or, in the words of the International Monetary Fund's Articles of Agreement, “manipulated" for “unfair competitive advantage." One criterion is an inappropriately large trade or current-account surplus. Another is an inappropriately low real (inflation-adjusted) foreign-exchange value. But many countries have large trade surpluses or weak currencies. Usually it is difficult to say whether they are appropriate.

Ten years ago, the renminbi did seem to meet all of the criteria for undervaluation. But this is no longer the case. The renminbi's real value rose from 2006 to 2013. The most recent purchasing power statistics show the currency to be in a range that is normal for a country with per capita real income of around $10,000.

By contrast, the criterion on which the US Congress focuses – the bilateral trade balance – is irrelevant to economists (and to the IMF rules). It is true that China's bilateral trade surplus with the US is as big as ever. But China also runs bilateral deficits with Saudi Arabia, Australia, and other exporters of oil and minerals, and with South Korea, from which it imports components that go into its manufactured exports. Indeed, imported inputs account for roughly 95% of the value of a “Chinese" smartphone exported to the US; only 5% is Chinese value added. The point is that bilateral trade balances have little meaning.

Congress requires by law that the US Treasury report to it twice a year which countries are guilty of currency manipulation, with the bilateral trade balance specified as one of the criteria. But Congress should be careful what it wishes for. It would be ironic if China agreed to US demands to float the renminbi and the result was a depreciation that boosted its exporters' international competitiveness.

The politician is rewriting the rule book for country’s socialism, writes Anne-Sylvaine Chassany

Emmanuel Macron’s political baptism of fire this week was a setback at home but a victory abroad.

France’s rookie (he is 37) economy minister failed to win enough parliamentary support to pass a bill that carries his name — L a loi Macron. With its range of liberalising measures, including more Sunday opening for shops, Macron’s law has became the most potent signal of President François Hollande’s commitment to reforming the eurozone’s second-largest economy.

Affable and impeccably turned out, Mr Macron sat in parliament for 193 hours over four weeks in an attempt to secure a majority. It was not enough to convince hardliners in his own socialist camp. On Tuesday, moments before the vote on the bill, with tension running high in a packed National Assembly, the usually calm Mr Macron lashed out at those in his party “who don’t want to change the country and who think everything is fine”. There was a chorus of boos as more than a dozen socialists refused to vote with their party.

The vote was called off at the last moment: Manuel Valls, the prime minister, was not willing to take a chance on the bill failing to pass just a week before a decision from the European Commission on whether to censure Paris for delaying (again) meeting a target for reducing its budget deficit. The package of reforms in the bill were seen as key to persuading the EU to act leniently towards France.

Mr Valls instead got the president’s permission to use a controversial clause, last used nine years ago, in the French constitution that allows the government to override parliament and pass a bill without a vote. “I was angry,” Mr Macron told the FT. “But it’s our duty to pass this law. The French wanted it, international investors were waiting for it, and so were our European partners who expect us to modernise our economy.” Six months into the job, the economy minister has seen France plunged into political turmoil because of a bill whose flagship measure gives mayors the power to let shops trade on 12 Sundays a year, rather than five, and which opens up parts of the French economy, such as intercity coach services and legal professions, to more competition. Fierce opposition to this rather modest law reveals France’s deep divide and soul-searching over how to pull itself out of stagnation without eroding its generous social model. Last month, speaking at a gathering of economists, Mr Macron criticised the “traditional school of thought, which is to throw more public money into the system, to create more state-aided jobs, or even put a ceiling to success”. Expanding on the theme, he told the FT: “The left I dream about is one that gives individuals the means to build their autonomy at each critical step of their lives. I believe in equal opportunities.”But the government’s youngest minister sounds too rightist for many in his party. His four-year-stint as a Rothschild banker does not help — many on the left think finance is the enemy. While at Rothschild, he engineered the $11.9bn sale of Pfizer’s baby food business to Nestlé — that deal alone made him a millionaire. He had met Nestlé’s chairman, Peter Brabeck-Letmathe, while working for a commission set up by then president Nicolas Sarkozy and headed by Jacques Attali, a left-leaning economist, to make recommendations on growth. An executive at Rothschild remembers Mr Macron as someone with “a brilliant mind, who would not sleep much, knows how to listen and absorb expertise from others”. When he arrived, he did not know much about mergers and acquisitions but was a fast learner, the executive said. “He can look relaxed on the surface, but there’s a lot of preparation and work beneath.” Mr Macron has an impressive academic background. He was brought up in a leftwing home in the northern French city of Amiens, where his parents were doctors. He attended a local Catholic school — his future wife, Brigitte, was a teacher there at the time. He finished his studies at Henri-IV, one of Paris’s most selective state schools. After graduating from the prestigious SciencesPo in the capital, he became an assistant to the French philosopher Paul Ricoeur. Mr Macron later earned a masters degree for his work on Machiavelli. In 2002 he left academia — he says he “preferred action to the prospect of a quiet academic life” and was selected for the Ecole nationale d’administration, the training ground for elite French civil servants. Mr Macron first met Mr Hollande in 2007, at a dinner party hosted by Mr Attali. The two became friends, and the president has supported Mr Macron through awkward incidents that show up his inexperience. Mr Macron had to apologise, for example, after referring to the plight of “illiterate” workers in a factory he had visited in Brittany.

The “Macron law” has been damaging for its creator: on Thursday, the government survived a no-confidence vote triggered by the decision to bypass parliament. The bigger picture, though, is “mission accomplished” — the French government can go ahead with reforms which are the price for EU leniency on missed deficit targets.

Emmanuel Macron has become the face of a younger, reforming France — and is optimistic that things will take a turn for the better. The forward-thinking left he is dreaming about is, he believes, “the majority within the socialist party”. There is nothing that a few hardliners “only interested in their political agenda”, can do to change that.

This article has been altered since original publication to reflect the fact that Mr Valls, rather than Mr Macron got the president’s permission to override parliament and pass a bill without voting.The writer is the FT’s Paris bureau chief

With the Greek Government and the Trokia back in the news right now, it’s a good time to take a look at Greece’s official gold reserves and examine how much gold Greece claims to hold, where this gold might be located, and explore the impact that the European bailouts or a Greek Euro exit might have on the Greek gold holdings.The 2012 Annual report of the Bank of Greece, the most recent full annual report available, provides some useful background on the Greek gold reserves. The Bank’s full 2013 annual report has not yet been posted on its website, and the 2014 annual report has not yet been published.In the 2012 report, the Bank of Greece claims to hold on its balance sheet, ‘gold and gold receivables’ of 4,746,000 fine troy ounces (147.6 tonnes).As of 31st December 2012, based on a gold price of €1,261.179 per fine ounce, this ‘gold and gold receivables’ asset item was valued in the balance sheet at €5.985 billion.The 147.6 tonne total of gold reserves might seem a lot higher than figures of 112 tonnes or 117 tonnes that are sometimes quoted in economic statistics or in the media. However, the 147.6 tonne figure includes a claim, by the Bank of Greece on the Greek State, for gold that was paid by the Bank of Greece to the IMF (subscriptions and quota increases etc) on behalf of the Greek State.As the 2012 annual report states:

“The amounts reported above comprise the Bank’s gold holdings (3,597 thousand ounces) and gold receivables from the Greek State (986 thousand ounces) corresponding to Greece’s participation in the IMF (the gold component of Greece’s quota has been paid by the Bank of Greece on behalf of the Greek State), as well as scrap gold and gold coins for melting (163 thousand ounces). A large part of gold holdings is kept with banks abroad.“

(Source: ‘Notes on the balance Sheet’ 2012 Annual Report, Page 209 of the pdf, page A15 of the report).

Gold Claim on Hellenic Republic

Why the Greek State has never paid back this 986,000 oz gold debt to the Bank of Greece is puzzling, but there would appear to be little chance of the repayment happening any time soon given the Greek State’s current fiscal position.Since Greece was one of the original members of he IMF back in 1945, the Bank of Greece gold claim on the Greek State may be a very long-standing claim and would comprise some or all of the initial gold subscription to the IMF in 1947, and various IMF quota increases that were implemented in 1958-59, 1965 and 1970.I think it’s misleading for the Bank of Greece to throw in this gold claim against the Greek State within its “gold and gold receivables” line item in the balance sheet. Even though it is a receivable in gold, it is not even the type of gold receivable that the European central banks had in mind when they pressured the IMF back in 1999 to deem the “gold and gold receivable” classification device as a legitimate accounting approach. (See below for a background on that issue).In my view this 986,000 Oz gold obligation on the Greek State should be itemised separately and not listed as part of the monetary gold holding line item. Where is this 986,000 Ozs of gold? It doesn’t even exist, except as a gold holding of the IMF and should not be double counted.Excluding this 986,000 oz (30.66 tonnes) IMF related claim on the Greek State, the Bank of Greece says it holds a total of 3.76 million ozs of gold (3,597,000 ozs + 163,000 ozs) which is roughly 117 tonnes. Excluding the scrap gold and gold coins, the figure is 3.597 million ozs, which is approximately 112 tonnes.

The Fantasy of ‘Gold and Gold Receivables’

Note that the 3.76 million ounce figure from 2012, excluding the IMF gold claim, is still in itself ‘gold and gold receivables’ and not necessarily earmarked gold held. The percentage of ‘gold receivables’ within the 3.76 million ounce figure, such as gold lent or gold swapped, is not divulged.The Bank of Greece uses the ‘gold and gold receivables’ gimmick because the Bank, along with all Eurosystem banks and most other central banks around the world, follows IMF central bank accounting guidelines when accounting for its gold holdings. And IMF accounting guidelines do not follow generally accepted accounting principles in this area.In 1999, the IMF, following objections from European central bank officials at the Bank of England, Deutsche Bundesbank, European Central bank (ECB) and Banque de France, back-tracked on a plan to introduce individual line item categories for gold and ‘gold receivables’ in the reserves data template of its Special Data Dissemination Standard, because breaking out this data into separate items would have revealed the workings of the gold loan and gold swap market, or what the IMF calls ‘highly market sensitive’ information.An IMF Executive Board paper from 1999, explains the issue:

“15. Central bank officials** indicated that they considered information on gold loans and swaps to be highly market-sensitive, in view of the limited number of participants in such transactions. Thus, they considered that the SDDS reserves template should not require the separate disclosure of such information but should instead treat all monetary gold assets, including gold on loan or subject to swap agreements, as a single data item. (page 6)“

** The ‘central bank officials’ referred to above were as follows:

“7. ……At the same time the (IMF) staff consulted the Bank of England, the Deutsche Bundesbank, the Banque de France, and the European Central Bank to review practical and methodological difficulties they might encounter in implementing the CGFS template, in light of recent decisions on publication of reserves data in the Eurosystem. (page 4)”

According to the latest IMF official reserves asset data for Greece, the Bank of Greece now claims to have monetary gold holding of 3.62 million ozs, marginally up from 3.597 million ozs. In fact, the monthly foreign reserves figures for the Bank of Greece (xls) frequently show small increases in the ‘Monetary gold (millions of the troy ounces)’ category, about 9,000 ozs per year or slightly less than 1,000 ozs per month.This increase in gold holdings could be reflecting interest in the form of gold received on gold deposits (gold loans) with bullion banks, and may suggest that the Bank of Greece has outstanding short-term gold loans that are being rolled over with the bullion banks (in the London gold market). Interest received on central bank gold deposits (time deposits) with bullion banks is often in the form of gold (accrued interest in gold).

Bank of Greece Headquarters, Athens

Where is the Greek gold?

On the question of the location of the Bank of Greece gold reserves, the only locational information provided on the gold reserves in the 2012 annual report, was that ‘a large part‘ of the gold was held abroad.Earlier Bank of Greece annual reports, from 2007 - 2010, state that “The largest part of gold holdings is kept in banks abroad.” It was only since 2011 that the wording ‘a large part is kept abroad‘ was introduced. Semantics maybe, however, the change in wording could indicate that some of the gold that was held abroad had been repatriated back to Greece sometime between 2010 and 2011. This was around the time that the Greek fiscal budget started to deteriorate rapidly.Alternatively, the previous phraseology could have included the Bank’s IMF gold claim since by definition, this gold is held by the IMF in its gold despositories, which are all located outside of Greece. But it’s not clear from the wording whether the gold claim on the Greek State has ever been included or excluded from the reference to where the gold reserves were located.Whatever the reason, it became less important on 1st March 2013, when Bloomberg published an article about the size and location of the Greek gold reserves. This article was based on a letter written by the Bank of Greece that had been forwarded by the Finance Ministry to a lawmaker in the Greek Parliament in response to the lawmaker’s query.The letter stated that as of 31st December 2012, Greek gold reserves totalled 3.76 millon ounces (approximately 117 tonnes). This figure tallies with the figure from the above 2012 annual report.On the location of the gold, Bloomberg said that, according to the document:

“Half is held at the central bank in Greece while the remainder is held at the Federal Reserve Bank of New York, the Bank of England and in Switzerland.”

“Greece’s gold reserves totalled 3.760 million ounces at the end of 2012, worth 4.74 billion euros, the country’s central Bank of Greece (BoG) said on Friday.

In a report to Parliament, communicated through Finance Minister Yannis Stournaras responding to a question by parliament deputies over the country’s gold reserves, the central bank said that Greece’s natural gold reserves at the end of 2012 amounted to 3.760 million ounces, worth 4.74 billion euros, of which half were under the custody of the Bank of Greece and the remaining under the custody of the Federal Bank of New York, the Bank of England and Switzerland.

The central bank noted that gold reserves which had been transferred for custody to the Bank of England during the Second World War were repatriated gradually in 1946-1956.”

The Bank of Greece therefore appears to currently maintain a 50/50 split between domestic and foreign held gold. This again may suggest that something changed after 2010 which altered the wording of ‘the largest part’ of the reserves being stored abroad. Where the domestically stored Greek gold is held, I’m not sure. Possibly in a vault in the Bank’s headquarters in Athens. Who knows.The Federal Reserve Bank of New York (FRBNY) and Bank of England as gold custodians for Greece’s gold is not surprising given that many foreign central banks store gold with these two institutions.The Bank of Greece has historically had a gold set-aside account at the Bank of England, not least for the Tripartite Commission’s gold distributions. Separately, in the IMF gold restitutions to its members in the late 1970s, the Bank of Greece did not use the Bank of England or the Banque de France or the Reserve Bank of India to receive restituted gold, so this implies that Greece used the FRBNY and would have needed a gold account at the FRBNY.The reference to Switzerland by the Greeks would either be a) a gold deposit or earmarked gold held with the Bank for International Settlements (BIS), b) earmarked gold held directly with the Swiss National Bank in Berne, or c) gold held with a Swiss commercial bank in Zurich such as Credit Suisse or UBS.

As to how much of the 50% of the Greek gold that’s stored abroad is in each of the three storage locations (New York, London and Switzerland), or how much of this gold is actually earmarked in custody is unclear. Some or all of this gold could be loaned or swapped or, as central banks like to say in their gold legal agreements, the gold may have other “liens, claims or encumbrances” against it.Given the perilous state of Greek finances, the custodial status of the Greek gold held with the Bank of England, FRBNY and in Switzerland deserves scrutiny. This would also apply to the 50% of the Greek gold that’s supposedly held by the Bank of Greece within Greece. This scrutiny will probably never be forthcoming however due to the unaccountability and lack of transparency on everything gold related within the world of central banking.

Seizing the Greek Gold? Not like Cyprus

In February 2012 during negotiations on Greece’s 2nd bailout (Second Economic Adjustment Programme of March 2012), the New York Times wrote an article quoting a Greek politician, Louka Katseli, who was unhappy that the loan deal undermined Greek sovereignty and believed that under the bailout deal, Greece’s creditors had a claim over the Bank of Greece gold reserves. As the NYTimes stated:

“Ms. Katseli, an economist who was labor minister in the government of George Papandreou until she left in a cabinet reshuffle last June, was also upset that Greece’s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal, and that future bonds issued will be governed by English law and in Luxembourg courts, conditions more favorable to creditors.”

According to the NYTimes, Katseli stated that:

“This is the first time ever that a European and probably an O.E.C.D. state abdicates its rights of immunity over all its assets to its lenders.“

Although the NYTimes referred in its article to “the fine print of the 400-plus-page document — which Parliament members had a weekend to read and sign“, I am not sure which 400 plus page document was being referred to. I cannot find any reference to gold or gold collateral in the European Commission’s ‘Financial Assistance to Greece’ web pages, nor in the Commission’s “The Second Economic Adjustment Programme for Greece” document. There isn’t, as far as I am aware, any collateral connection between the Bank of Greece gold reserves and the sovereign debt of the Greek State.In comparison, the Troika’s (ECB, IMF and European Commission) bailout deal of the Cypriot banking sector in 2013 (“The Economic Adjustment Programme for Cyprus”) did explicitly mention Cypriot gold and the possible sale of €400 million worth of gold, as follows:

27. The “programme” scenario takes into account a number of policy measures to strengthen debt sustainability, in particular (i) proceeds generated by privatisation of state-owned assets; (ii) the proceeds from the sale of excess gold reserves owned by the Republic of Cyprus;

29. Sale of excess gold reserves: It is envisaged to use the allocation of future central profits of approx. EUR 0.4 bn, subject to the principle of central bank independence and provided such profit allocation is in line with CBC rules and does not undermine the CBC duties under the Treaties and the Statute. This is estimated to generate one-off revenues to the state.

CBC is the Central Bank of Cyprus. But as the above ‘adjustment programme’ points make note of, Eurosystem central banks cannot be forced to sell their gold reserves to meet their government’s financing needs. This is due to Article 7 of the protocols on the European System of Central Banks (ESCB) and the ECB which states that the ECB and national central banks can’t seek or take direction from European Union government or institutions and, likewise, European Union governments and institutions are not allowed to influence the national central banks or the ECB.The Central Bank of Cyprus never did sell any of its gold, but the rumours at the time, especially in April 2013, caused weakness in the gold price and were undoubtedly used by some as justification to accelerate the gold price weakness. Cyprus had, and still has, only 13.9 tonnes of gold and the sale proceeds from any Cypriot gold sale, would, like Greece, have only covered a small fraction of its bailout obligations to the Troika.By December 2013, Reuters had released an article saying that Cyprus had “no plan to sell gold reserves to fund its €10 billion euro bailout”:

‘”We do not intend to sell the gold,’ a senior official at the central bank told Reuters, declining to be identified.”

“Asked about any alternative method to raise the 400 million euros, the official said: ‘They (the government) have to go back to the troika and say this (a gold sale) is not going to happen.'”

“While the Cypriot government had said sales would be considered, the central bank had typically been cool to the idea. The governor of the central bank would have the final say in such a sale, the central bank sources said.”

With Greek gold reserves eight times the size of those of Cyprus, any talk of Greek gold sales would be sure to have an adverse affect on the gold price. However, given that there does not seem to be any evidence that the Trokia have discussed or planned for such gold sales, any suggestions of this in the media would be irresponsible.

Grexit and Greece’s gold claim on the ECB

In its balance sheet, the Bank of Greece also lists a claim on the European Central Bank under an item called “Claims equivalent to the transfer of foreign reserves to the ECB” (9.2).In 1999, the founding member national central banks of the Euro (stage 3 of Economic and Monetary Union) transferred about €40 billion in foreign reserve assets to the ECB, with 85% of this total paid in US dollars and Yen and 15% paid in gold. There are now 19 European national central banks in the Euro, and Greece has a little less than a 2.8% share in the claims on this foreign reserve pool, 15% of which is in gold. The gold in this pool is managed on a decentralised basis by the member national central banks on behalf of the ECB.In September 2011 (after the first Greek bailout [May 2010] but before the second Greek bailout [March 2012]), when fears of Greece leaving the EU were in full flight, I wrote to the ECB press office and asked them, in quite precise language, what would become of Greece’s gold contribution to the Eurozone if Greece exited from the Euro. My question to the ECB was as follows:

“In a scenario under which a Eurozone member state left the common currency zone, would the foreign reserve assets of that member state which had been contributed by that member state’s central bank to the ECB (i.e. the claims on the ECB established via Article 30 of the ESCB Statute, initially comprising 15% gold and 85% other currencies and subsequent top ups), be reimbursed to the departing members state’s central bank, or, given that a departing member state would most likely have been one to which the ECB had an outstanding loan (and so having a liability to the ECB), would the ECB seek to net the loan against the member state’s claims (made up of major currencies and gold)?”

The Communications Directorate of the ECB’s Press and Information Division promptly responded that:

“Please note that there are no legal provisions for a hypothetical scenario of the kind you describe.

You may be interested in the following Legal Working Paper, although the views expressed in it do not necessarily reflect the views of the ECB:

The document that the ECB refered me to is titled Withdrawal and Expulsion from the EU and EMU – Some Reflections – by Phoebus Athanassiou, Legal Working Paper Series. No 10, December 2009.Coincidentally, or not, Phoebus Athanassiou, the author of the paper, is Greek. According to his faculty profile at the Institute For Law And Finance (ILF) in Frankfurt, Dr Phoebus Athanassiou is “Senior Legal Counsel with the Directorate General Legal Services of the European Central Bank (ECB).”Athanassiou also has an interesting connection to Cyprus since, according to the ILF profile, he “specialises in European Union, Greek and Cypriot financial law.” Prior to joining the ECB in 2004, Athanassiou “was in private practice, with the Athens Law Firm of Tsibanoulis & Partners, inter alia acting as consultant to the Government of the Republic of Cyprus on the transposition of the acquis in the fields of securities, banking and insurance law.” Acquis refers to Acquis communautaire, which just means the entire body of European laws (treaties directives and regulations etc).Athanassiou’s paper is very detailed and technical, and while there has been lots of coverage of it in the media over the last few years, the paper only discusses whether a country is allowed to exit the EU or exit EMU, not whether a departing country would get its gold back if it left EMU.In summary, Athanassiou says in his 2009 paper:– that before the Lisbon Treaty of 2007, there was no legal way for a member country to exit from the European Union (EU), and even though there is now (Article 50), it would be still legally problematic;– that a member country of EMU (in the Euro) could not exit the Euro without exiting the EU;– that “no right of withdrawal from EMU was ever intended to exist“;– and that a member of the EU or EMU cannot be forced out because it requires the consent of all members including the member being expelled, i.e. “A Member State’s expulsion from the EU or EMU would inevitably result in an amendment of the treaties, for which the unanimous consent of all Member States is necessary under Article 48 TEU.”Deal on the Table

With a Greek-Eurogroup deal now back on the table, the Athanassiou legal arguments still look to be sound. Just before the deal, there were reports of the ECB preparing for a Greek exit from the Euro. How this could even be legally undertaken is unclear. On 20th February 2015 Reuters reported that:

“The European Central Bank is preparing for the event that Greece leaves the euro zone and its staff are readying contingency plans for how the rest of the bloc could be kept intact, German news magazine Spiegel reported in a preview of its magazine.”

There is no legal way for a Euro member to exit the Euro. If it did somehow happen, a Greek exit from the Euro would have serious ramifications both financially and politically. Would the Bank of Greece also have to leave the ESCB group?Anytime the prospect of Greece leaving the Eurozone flares up, there is always chatter that Greece would be somehow forced into selling its gold reserves.Even though the European Central Bank Gold Agreements (CBGAs) on gold sales are supposedly not legally binding, the Bank of Greece gold holdings, worth less than €4 billion, are tiny in comparison to the colossal sovereign debts the Hellenic Republic faces, and would only make a small dent in the debt repayments.The gold price should in theory benefit more from the financial volatility of a Grexit than it would suffer from the fear of Greek gold sales. However, the case of the feared Cypriot gold sales in 2013 shows that gold market players can use these fears to their advantage in pushing the gold price around.If Greece stays in the Eurozone, which looks likely, it cannot independently sell its gold without the go-head of the ECB. This is because the ECB controls, or has a say in, the management of not just the gold transferred to it as part of the foreign reserve transfers of the participating national central banks, but all the monetary gold held as reserve assets by the member national central banks (under the ECB definition, reserve assets includes monetary gold).Article 31 of the Statute of the ESCB and ECB, which addresses foreign reserve assets held by national central banks, says that beyond certain pre-existing obligations to various international organisations, “all other operations in foreign reserve assets remaining with the national central banks” are “subject to approval by the ECB in order to ensure consistency with the exchange rate and monetary policies of the Union.” So, any Euro member central bank would have to get the approval of the ECB before buying or selling any of its monetary gold.In conclusion, Greece is not an insignificant holder of monetary gold. Its holding of 110+ tonnes makes it a reasonably sized gold holder amongst the world’s central banks. The supposed storage locations of Greece’s gold are not surprising but as to whether the gold is there and in what form the various holdings are is anyone’s guess.Greece cannot just walk away from the Euro since such a scenario was never envisaged by the Eurocrates, and they will do whatever it takes to prevent such a scenario happening. As to whether Greece, or any Euro member, would get its gold back if it somehow managed to escape from the Euro, that is a scenario that as the ECB told me, “there are no legal provisions for.”

The radical Syriza government submitted a five-page list of measures to EMU officials in Brussels in time for a deadline on Monday

By Ambrose Evans-Pritchard, in Athens

8:23PM GMT 23 Feb 2015

Anti-austerity protestors in Athens. The most contentious elements of Greece's 'second pillar' for economic policy have been shelved or toned downPhoto: AFP

Greece has vowed to shake up labour markets and push through far-reaching reforms to avert a fresh showdown with eurozone creditors this week, hoping to stave off bankruptcy within days as cash runs dry.

The radical Syriza government submitted a five-page list of measures to EMU officials in Brussels in time for a deadline on Monday, including an assault on trade union powers that risks setting off a revolt by the movement's Communist and hard-left factions.

Failure to reach an agreement would lead to yet another round of crisis talks, backed by the threat that the European Central Bank could at any time cut off emergency liquidity support for Greek lenders and effectively force the country out of the euro. European officials said the Greek list had run into reservations at its first hurdle with technocrats in Brussels, causing a delay. This is even before it goes to eurozone finance ministers on Tuesday, where the reception may be frigid. There is pervasive concern that any deal will unravel within weeks even if there a reprieve now. The deal aims to give Greece four months breathing room to flesh out its plans. It requires the approval of all the EMU parliaments, including the German Bundestag, where Chancellor Angela Merkel faces her own headaches if the terms are not tough enough. Bavaria's Social Christians (CSU), her coalition allies, reacted angrily to claims by Greek premier Alexis Tsipras that Athens had scored a major victory over European creditors last Friday. "If Mr Tsipras is now saying that austerity is over in Greece, and if he is saying he has won the battle, all the alarms must go off," said Gerda Hasselfeldt, the CSU's parliamentary leader. The neuralgic issue for the Greek left is a proposal in the list for "smart" rules on collective bargaining that hint at the firm-level and factory-level wage deals implemented in Germany under the Hartz IV reforms. Syriza had campaigned to restore full union powers that were rolled back by the Troika. Panagiotis Lafazanis, head of the Left Platform and now the production minister, said his grouping cannot accept any departure from a "radical left orientation". He vowed to press ahead with new laws freezing foreclosures on primary homes and stretching out payments on €74bn of tax arrears. The Left Platform controls 30pc of the seats on Syriza's central committee. Syriza leaders are alarmed by a cri de coeur on Sunday by Euro MP Manolis Glezos, the legendary resister who tore down the Swastika flying over the Acropolis under Nazi occupation. He apologised to voters for selling the "illusion" that Syriza could overthrow the EU-IMF Troika. "There can be no compromise between oppressor and oppressed. Freedom is the only solution for the slave," he said. Syriza sources expect party discipline to hold despite "kicking and screaming" from the Left. The labour reforms are to be carried out with the worker-friendly International Labour Federation instead of accepting the harsher variant of the IMF under the Troika. The OECD will "mentor" measures to boost productivity. Greek officials say the package will uphold the "first pillar" of Syriza's Thessaloniki Programme for humanitarian needs, costing €1.8bn. This includes free electricity and food stamps for 300,000 for the indigent, and a pension boost for the less well-off. The most contentious elements of the "second pillar" for economic policy have been shelved or toned down, such as plans to scrap a new tax on first homes (ENFIA) and boost income tax thresholds to €12,000. Privatisations under way will be respected. New sales will be reviewed. The state will keep control of strategic companies and utilities. There will be a new regime for state procurements, which gobble up 15pc of GDP. The financial crimes squad will be revamped, with a crackdown on smuggling for shipping fuel. Fuel tankers will have to carry GPS devices. Tax loopholes preserved by Greece's ruling dynasties until now will be attacked. "This is a fresh start for us. The Greek people will have the opportunity to co-author our 'contract' with Europe," said the finance minister, Yanis Varoufakis, in an interview with CNN. Syriza will press ahead with a rise in the minimum wage, though the list does not specify the figure of €750 a month in the manifesto. The International Monetary Fund warned that any rise will make it even harder to combat unemployment stuck at 24pc. It says the current level is already on the high side, given Greek productivity. The package is just a starting point. It will face fresh hurdles, amid a mood of zero-tolerance in northern Europe. Walter Bosbach, interior spokesman for Germany's Christian Democrats, said the terms are far too vague to pin down Syriza, and accused the Greeks of promising anything to get more money. "Billions more are going to be flowing to Greece. It is highly unclear whether we will get anything back from this," he said. Germany may be right to suspect that Syriza has slipped the austerity leash. The deal scraps Troika demands for a rise in the primary budget surplus from 1.5pc of GDP in 2014 - in reality nearer 0.6pc - to 3pc this year, and 4.5pc next year. The surplus will now be "appropriate" to economic circumstances. Dimitris Drakopoulos, from Nomura, said relations between Athens and EMU creditors could go wrong at any time. Syriza will have to deliver on pledges with actual legislation to meet a deadline in April before it receives the next €7.2bn of bailout money. In the meantime, Greece may face "cash flow problems" within 15 days. Syriza will need to raise €4bn to €5bn by the end of March in a hostile market. "The risk of capital controls remains elevated," he said. Mr Drakopoulos warned that there will be a constant risk of a "new stand-off" until the political landscape changes again, perhaps with a national unity government. There may yet be a referendum on the bailout package. "Very soon the Syriza-led government will be forced to face its own contradictions," he said.

Benchmarks for the four precious metals affect jewelry prices and financial products. Photo: BloombergU.S. officials are investigating at least 10 major banks for possible rigging of precious-metals markets, even though European regulators dropped a similar probe after finding no evidence of wrongdoing, according to people close to the inquiries.Prosecutors in the Justice Department’s antitrust division are scrutinizing the price-setting process for gold, silver, platinum and palladium in London, while the Commodity Futures Trading Commission has opened a civil investigation, these people said. The agencies have made initial requests for information, including a subpoena from the CFTC to HSBC Holdings PLC related to precious-metals trading, the bank said in its annual report Monday.HSBC also said the Justice Department sought documents related to the antitrust investigation in November. The two probes “are at an early stage,” the bank added, saying it is cooperating with U.S. regulators. Also under scrutiny are Bank of Nova Scotia , Barclays PLC, Credit Suisse Group AG , Deutsche Bank AG , Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Société Générale SA, Standard Bank Group Ltd. and UBS AG , according to one of the people close to the investigation.Bank representatives declined to comment or couldn’t be immediately reached. A CFTC spokesman declined to comment, as did a spokeswoman for the Justice Department. The precious-metals probes are the latest example of regulatory scrutiny into how the world’s biggest financial institutions influence widely used benchmarks. Until last year, prices for gold, silver, platinum and palladium were set using a decades-old practice of once- or twice-a-day conference calls between a small group of banks. The process for setting each of the price “fixes” has since been overhauled.Benchmarks for the four precious metals affect jewelry prices and financial products such as exchange-traded funds. U.S. commercial banks regulated by the Office of the Comptroller of the Currency had $115.1 billion of precious metals-related contracts outstanding as of Sept. 30.Previously launched investigations of the interest-rate and foreign-currency markets have led to billions of dollars in settlements from major financial firms. Related probes are continuing in the U.S. and Europe, with additional cases against firms and individuals by the Justice Department expected in the coming months, according to people familiar with the matter.In the interest-rate investigations, banks often reached settlements with U.S. and U.K. regulators, which made similar allegations of collusion in the rate-setting process. In contrast, the U.K. Financial Conduct Authority and German financial watchdog BaFin reviewed the precious-metals benchmarks but closed their inquiries without finding evidence of wrongdoing, according to people familiar with those probes.Robert Hockett, a law professor at Cornell University, said it is “not particularly surprising” that the Justice Department is plowing ahead despite the decision by European regulators. Recent scrutiny of big banks’ operations in the physical commodities markets and criticism of the Justice Department’s financial-crisis track record make it “quite understandable” that the agency would investigate allegations of precious metals price-rigging.Last year, the FCA fined Barclays £26 million ($40.2 million) for lax controls after one of its traders allegedly manipulated the gold fix at the expense of a client. The bank said at the time that it regretted the situation that led to the settlement and has enhanced its controls. A Barclays spokesman declined further comment.Swiss regulator Finma settled last year allegations of foreign-currency manipulation with UBS. The regulator said it found “serious misconduct” among precious-metals traders at UBS, including “front running,” or trading ahead of, the silver-fix orders of one client. A spokeswoman for UBS, which said at the time that it “instituted significant cultural and compliance changes,” declined further comment.Some of the banks under scrutiny by the regulators are also fighting potential class-action lawsuits filed by investors, traders and other plaintiffs in a federal court in Manhattan.More than 25 lawsuits have been filed against Barclays, Deutsche, HSBC, Bank of Nova Scotia and Société Générale over their alleged role in setting the gold fix. The plaintiffs are seeking damages for losses suffered due to the alleged manipulation of the price of the metal and gold derivatives. Law firm Berger & Montague, the court-appointed co-lead counsel for the proposed class-action suits, said the gold fix affected trillions of dollars worth of gold and related financial contracts.Jewelry company Modern Settings LLC last year sued the firms that used to set the platinum and palladium fixes. The proposed class-action suit seeks unspecified damages from Goldman, HSBC, Standard Bank and BASF Metals Ltd, a unit of chemical giant BASF SE, for losses suffered from their alleged “nearly eight-year unlawful conspiracy to manipulate and rig” the metals benchmarks. The banks and BASF are fighting the lawsuits.Meanwhile, the CFTC and Justice Department are pushing ahead with an investigation into another interest-rate benchmark, according to people familiar with the probe. Investigators are scrutinizing whether bank traders or brokers were involved in the potential manipulation of the ISDAfix, a measure used widely in areas such as setting payout rates on pension funds and determining the cost of real-estate loans.Representatives of the agencies declined to comment.

LET me tell you about the perfect investment offer. Each week you will receive a share recommendation from a fund manager, telling you whether the stock’s price will rise or fall over the next week. After ten weeks, if all the recommendations are proved right, then you should be more than willing to hand over your money for investment. After all, there will be just a one-in-a-thousand chance that the result is down to luck.Alas, this is a well-known scam. The promoter sends out 100,000 e-mails, picking a stock at random. Half the recipients are told that the stock will rise; half that it will fall. After the first week, the 50,000 who received the successful recommendation will get a second e-mail; those that received the wrong information will be dropped from the list. And so on for ten weeks. At the end of the period, just by the law of averages, there should be 98 punters convinced of the manager’s genius and ready to entrust their savings.As a paper published last year in the Journal of Portfolio Management argued, this is a classic example of the misuse of statistics. Conduct enough tests on a bunch of data—run through half a million genetic sequences to find a link with a disease, for example—and there will be many sequences that appear meaningful. But most will be the result of chance.This is a problem that has dogged scientists across many disciplines. There is a natural bias in favour of reporting statistically significant results—that a drug cures a disease, for example, or that a chemical causes cancer. Such results are more likely to be published in academic journals and to make the newspaper headlines. But when other scientists try to replicate the results, the link disappears because the initial result was a random outlier. The debunking studies, naturally, tend to be less well reported.Faced with this problem, scientists have turned to tougher statistical tests. When searching for a subatomic particle called the Higgs Boson, they decided that to prove its existence, the results had to be five standard deviations from normal—a one-in-3.5-million chance.Financial research is highly prone to statistical distortion. Academics have the choice of many thousands of stocks, bonds and currencies being traded across dozens of countries, complete with decades’ worth of daily price data. They can backtest thousands of correlations to find a few that appear to offer profitable strategies.The paper points out that most financial research applies a two-standard-deviation (or “two sigma” in the jargon) test to see if the results are statistically significant. This is not rigorous enough.One way round this problem is to use “out-of-sample” testing. If you have 20 years of data, then split them in half. If a strategy works in the first half of the data, see if it also does so in the second out-of-sample period. If not, it is probably a fluke.The problem with out-of-sample testing is that researchers know what happened in the past, and may have designed their strategies accordingly: consciously avoiding bank stocks in 2007 and 2008, for example. In addition, slicing up the data means fewer observations, making it more difficult to discover relationships that are truly statistically significant.Campbell Harvey, one of the report’s authors, says that the only true out-of-sample approach is to ignore the past and see whether the strategy works in future. But few investors or fund managers have the required patience. They want a winning strategy now, not in five years’ time.The authors’ conclusions are stark. “Most of the empirical research in finance, whether published in academic journals or put into production as an active trading strategy by an investment manager, is likely false. This implies that half the financial products (promising outperformance) that companies are selling to clients are false.”For the academics, the lesson is simple. Much more rigorous analysis will be needed in future to reduce the number of “false positives” in the data. As for clients of the investment industry, they need to be much more sceptical about the brilliant trading strategies that fund managers try to sell them.All this will leave many readers wondering how to invest their savings. That’s fine. Buttonwood has an investment strategy that is sure to boost your wealth. Just send your e-mail address and a stock tip will arrive every month...

Jonathan Hill, who oversees financial services in Europe for the European Commission.Credit Francois Lenoir/Reuters

The leaders who created the European Union hoped that binding together their economies would increase prosperity and reduce the chance of conflict. But the union is far from complete, especially in the financial sector.

Last week, European officials proposed uniting their capital markets to make it easier for businesses and individuals to invest and borrow money across the 28 countries that make up the union, something that has been made difficult by differing national laws and regulations. The European Commission, the executive branch of the E.U., outlined strong goals that would, for example, make it simpler for German savers to invest in mutual funds that own stocks across Europe or for Italian corporations to sell bonds to French insurance companies. But European officials have not yet outlined a detailed plan to achieve this.

A well-regulated capital markets union would take years to create but could provide a boost to the struggling European economy by reducing the cost of borrowing money, especially for small and medium-size businesses, and providing savers with greater investment opportunities. Combining Europe’s stock and bond markets would also reduce the reliance on banks, many of which have not yet recovered from bad investments and loans made before the financial crisis.

To realize these benefits and to protect against another crisis, European officials should create new regulatory agencies, or use existing ones, to issue and enforce strong financial rules in coordination with national agencies. They will have to guard against efforts by special interests to use the creation of a capital markets union to roll back sensible European and national regulations that were put in place in response to the global financial crisis. They should also create a common approach to resolving defaults and bankruptcies, so borrowers and lenders have confidence that they will be treated the same regardless of where they are based.

Some politicians will not be willing to hand over more control to centralized European agencies, given increasing skepticism about the E.U. among voters in many countries. This is especially true in Britain, where the U.K. Independence Party has won elections by arguing that the country should leave the European Union. Partly in response to this movement, Prime Minister David Cameron has promised to hold a referendum by the end of 2017 to let voters decide whether Britain should stay in the E.U.

Britain’s posture toward a capital markets union will be important, because London is Europe’s biggest financial hub. A serious blow could be dealt to the prospect of a union if a coalition that includes parties hostile to the E.U. comes to power after Britain’s parliamentary election in May.

In recent years, European leaders have done too little to make the union stronger. The misguided demands by officials in Germany and on the European Commission for austerity in Greece, Spain, Ireland and other economically troubled eurozone countries has contributed to high unemployment in those nations. It is little wonder that many Europeans are losing faith in the E.U.

Creating a capital markets union, a technocratic exercise that requires changing financial laws and regulations, could have substantial economic benefits. Just as important it would reaffirm the importance of the European project.

Analysts have recently called for all kinds of oil price recoveries: V-shaped, L-shaped, W-shaped.

US shale oil was the main driver of global excess supply, but now the number of active oil rigs fell off a cliff.

Global demand remains weak and supply high.

High storage build will delay any impact on prices once demand picks up.

Shale technology is very flexible and shale oil wells will come back on stream quickly once prices recover.

Last week, two reports highlighted the dissent among investors over what an oil recovery will look like: V-shaped, L-shaped or W-shaped? While Kepler Cheuvreux's analysts Mark Lewis argued for a V-shape in this Financial Times article, Citigroup (NYSE:C) and Edward Morse argued for a W-shape. Goldman Sachs (NYSE:GS) and oil giant BP (NYSE:BP), on the other hand, are expecting an L-shape recovery.

V-Shape: US Shale Main Driver of Excess Supply

So what are the respective arguments? Kepler argues that US shale oil was the main driver of global excess supply, but has been hit substantially by the low oil price. The industry is now in a severe crisis if you look at data provided from Baker Hughes (NYSE:BHI). Kepler looks at the number of active oil rigs in the US which has fallen off a cliff since December. The peak was reached in October with a total of 1,609 rigs drilling for oil. Since mid-December, the rig count fell every week and the fall has accelerated through January. The two charts below show the total number of active US oil rigs and the weekly change over the last 4 years.

(click to enlarge)(click to enlarge)(Source for both charts: Baker Hughes)

US shale oil has been the primary driver of excess supply. Shale production increased from 0.6 mb/d in 2008 to 4.7 mb/d in 2014. Without US shale, global oil supply would have been 72.6 mb/d last year which compares to 73.6 mb/d in 2005. The following chart illustrates this once more: the increase in global oil supply over the past few years was almost entirely due to US shale oil production. Kepler argues that the fall in active US oil rigs is a leading indicator of US oil supply and, thus, we should see prices recover as the number of active rigs falls and excess supply abates.

So Kepler argues for a V-shaped recovery starting from the middle of the year. They do not expect it to happen immediately as the fall in active rigs has to feed through into actual production and some new rigs are still about to be completed.

However, once the impact of a dramatically lower rig count starts feeding through into shale oil supply from the middle of the year, prices should start to rally on a more sustained basis, with Brent likely to be back at $75 by year-end.

L-Shape: Lower For Longer

On the other hand, we have less optimism coming from Goldman Sachs and BP, the British oil company. Goldman COO Gary Cohn said in late January:

We're probably in the lower, longer view

Their intuition is the following: if you are a consumer, you want to lock in the currently low prices and hedge more than you usually would. That means there is a high demand for oil futures for delivery in say a year's time. On the other hand, if you are a producer and you see a decently steep forward curve with prices 10-20% higher for delivery in 12 months, you also want to lock in that forward price. So there is not just ample demand, but also supply of oil futures.

As I am writing, the forward price of a future on WTI crude oil for delivery in December 2015 is a bit more than $59. This compares to $50.96 for the March future. So December oil is about 16% more expensive. Given this incentive structure, it becomes clear that it may take a long time for prices to recover. Oil prices for an increasing amount of oil delivered in the future are being locked in, and the more contracts are traded, the less flexibility there is for prices to increase in the near future. So, the often expected rebound towards $75 by year-end seems increasingly unlikely and that explains why Goldman expects an L-shaped recovery.

BP on this same page even expects the oil price to stay in a range of $40 to $60 for up to 3 years. BP's CEO pointed out not just to ample supply, but also to sluggish demand as China is not growing as fast as it used to anymore. Actually, it was weak industrial production data from China in the first place which made people fear that the fall in oil prices might be a demand problem too. Before that, everybody had simply been blaming oversupply. In that week, equities around the world suffered their biggest weekly losses since 2011. That highlights how much importance people assess to Chinese demand, and given this, it is not surprising that BP also expects an L-shape.

Last but not least we have the latest report from Citigroup. They view the recent surge in oil prices as a "head-fake" as analyst Edward Morse wrote. Prices could drop again to as low as $20, but will recover towards $75 until year-end.For Citi, there are three key factors that will determine the evolution of oil price: (1) consistently high oil supply, (2) storage building, and (3) shale rigs can be redeployed quickly when prices recover.Regarding point (1), Citi sees global oversupply to persist throughout the first half of 2015.Despite the declining number of active US oil rigs, Russia and Brazil are pumping at record levels, and the Arab countries, such as Saudi Arabia, are more worried about maintaining their market share by cutting prices to Asia. So supply will be remain high despite the price drop. Second (2), there is a lot of storage building which was just confirmed by the latest numbers from the EIA this week. US crude oil inventories rose by 7.7 million barrels last week to a record 425.6 million barrels. So, once demand recovers it will have to partly eat through this new storage first. This will cause a delay to any price recovery. Combined, points (1) and (2) could lead to oil prices falling towards $20 in the first half of 2015, Citi says.

Another important point (3), as was also highlighted by Kepler, is that it is now all about shale. The number of active US oil rigs may be falling, but that does not mean that the wells are being destroyed. The shale technology is very flexible. Shale wells can be put back to work in a matter of months or even weeks and they drain a lot faster than conventional wells. Thus, shale production can increase and contract rapidly. So, every price increase will lead to more shale oil production and the price will fall again. This is the reason why Citi expects a W-shaped recovery.

What Shape Will It Be?

The crucial question now is: what shape will it be? Let us quickly summarize the respective arguments.

US shale oil was the main driver of excess supply, but the number of active oil rigs has fallen substantially.

Low prices in combination with a fairly steep forward curve provides incentives for consumers and producers to enter into more forward agreements than usual, thus cementing the current price structure.

Global demand remains weak.

Supply will remain high as Russia and Brazil are pumping at record levels, and countries such as Saudi Arabia are more concerned about maintaining their market share and willing to accept lower prices in favor of market share.

High storage build will delay any impact on prices once demand picks up.

Shale oil wells will come back on stream once prices recover.

From what we have read so far, I think a V-shaped recovery is very unlikely. It is true that shale accounts for most of the oversupply and the oil rig count might be a good leading indicator for less supply coming out of the US. But given the flexibility of shale technology, I do not see the opportunity of a sustained recovery even if US production falls in the short term.My take from this is that shale has basically destroyed the power of OPEC to dictate prices, which is also what Citi wrote in their report. Shale has the power to be the swing factor for global oil supply. It has the power to fix the oil price to a low level because of the flexibility described above. Any time prices recover past the threshold where shale becomes profitable again, wells will be redeployed and prices will fall again, leading to cyclicality around a level substantially below $100. Previously, OPEC had the role of a price stabilizer, cutting production every time prices dropped. This kind of stabilization worked the other way round than the shale one by putting a flower on prices. Shale, on the other hand, puts a ceiling on prices. As Alan Greenspan recently wrote, shale has taken the price setting power from OPEC:

The shale technology breakthrough is likely to be a far more effective stabilizer of oil prices than the cartel of oil producing countries. [OPEC] is now relinquishing its pricing power. It may never be regained.

In summary, I believe oil prices will see a combination of an L- and W-shape recovery. We will see the fluctuations of the W, but on a lower for longer level (L). Will oil be back at $75 by year-end? I do not know. Will it fall to $20? I do not know that either. But I think it is likely that prices will stay below $80 for quite some time. However, one unknown remains. We can discuss about the supply side forever. But the demand side is as important, and how that will develop is maybe even more difficult to quantify.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.